Information and Authority

Authority often relies on information whose collection and transmission by subordinates its very exercise discourages. In this paper, we study how the allocation of authority affects the production, transmission, and strategic use of subjective intelligence relying on exhaustive data on credit decisions. Exploiting the exogenous variation in branch-headquarters distance we find that the center is more likely to delegate authority the further away line units are. Consistent with economic theory, more autonomous branches produce more soft information; conversely, the more information they produce, the more real authority they enjoy. Our findings also identify incentives to strategically use soft information in response to local competition as a further channel through which the delegation of authority affects investment success. Finally, we provide strong evidence that in equilibrium the delegation of authority helps to overcome distance related obstacles to corporate-decision making through subjective intelligence.

Agarwal, Sumit and Hauswald, Robert B.H., Authority and Information (February 2010). AFA 2011 Denver Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1566062 or http://dx.doi.org/10.2139/ssrn.1566062